How Bitcoin Is Mined: A Guide to Understanding Bitcoin Economics

Mining is the foundation stone of nearly every cryptocurrency. Thanks to mining coins can exist. And, bitcoin was the first cryptocurrency that gave the world this invention and brought billions of dollars in profits.

The very idea of the process is quite simple: the miners find blocks from which the blockchain consists. In general, the block is one long chain of blocks and they contain information about all transactions in the system. The prime task of the miners is to support and develop this chain, along with securing it from scammers.

How much money

Mining is hard work, which must be paid accordingly. For every new block that is generated, or sealed off, the miner receives a share of the pie.

Now the reward for mining one bitcoin block stands at 12.5 BTC or about $81,577 at the rate for August 20, 2018.

But the reward is not constant. Bitcoin developers laid down the special algorithm in coin’s blockchain. According to it, the reward for the block's extraction is halved every 210,000 blocks. In total for the history, there were two such reductions. The first halving occurred in November 2012. At that time the prize decreased from 50 to 25 BTC. The second happened relatively recently — in July 2016. This time the “pie” has decreased to 12.5 BTC.

The next halving is scheduled for May 22, 2020. By that time, the miners have to procure another 210,000 blocks, and the prize for each block will be reduced to 6.25 BTC.

The Last Bitcoin

Mining for Bitcoin can be compared to digging for valuable resources such as gold. Like gold, the amount of BTC is limited. In total, 21 million Bitcoins may appear in the world. Simultaneously, 17.2 million or 82% of the total amount have already been mined.

However, this does not mean that the miners will produce the remaining amount of BTC right now. In fact, this will not happen even in the foreseeable future. The number of hashes - capacities that are required for BTC mining - is growing every day. So, in mid-August last year, the number of hashes in the system was 5.966 million TH/s, according to Blockchain.com. A year later this indicator jumped by 672% and reached 46.054 million TH/s.

Only in a year the number of hashes in the system jumped by more than 7 times. Blockchain.com data

Fortunately, the creator of bitcoin, Satoshi Nakamoto, has implemented a security mechanism in code, due to which the complexity of mining increases depending on the number of hashes in the system. And in truth, since August of last year, the difficulty of mining has jumped more than 7-fold — from 923 billion to 6,389 trillion.

The complexity of mining balances growing hashes. Blockchain.com Data

Thanks to this system, the production of the remaining BTC will continue until 2140.

Best Mining Hardware

So, with the rising difficulty, miners just need to invest more money in the equipment to combat the complexity. And the best way to measure the effectiveness of equipment is to see how many hashes it produces.

But what is a hashrate? It calculates the total amount of data processing any given hardware can conduct each second. The higher rate achieved the better chances your mining operation will have of solving these mathematical equations, generating blocks, and ultimately acquiring the associated reward.

Hash sequencing requires plenty of work through trial and error, processing random low probability data until an output is matched. In addition, mining is naturally competitive, as miners race against the clock to process input data fast enough to receive a reward. For mining to be successful, hardware associated with a higher hashrate is key. Optimal hardware designed to mine Bitcoin ranges between 336 mega-hashes per second to 14M mega-hashes per second.

Energy Consumption

Mining consumes an enormous amount of energy. Now Bitcoin mining takes more than 73 TWh per year. And this is quite commensurate with the energy consumption of the whole country. For example, Austria consumes only 72 TWh per year. Moreover, the consumption of BTC mining is increasing every day. Only in the last year, it jumped five times, according to the Bitcoin Energy Consumption Index.

In just one year, the energy consumption of BTC production equaled the electricity needs of the whole of Austria. Data from Digiconomist.

Therefore, before proceeding to mining, it is worthwhile to carefully consider the cost of electricity. After all, this parameter will directly affect the profitability of mining. For example, Elite Fixtures has calculated the cost of BTC mining in different countries, given the cost of electricity. It turned out that it's the cheapest to get Bitcoin in Venezuela. Here the production of one BTC will cost only $531.

The most expensive production is in South Korea. Here for production of 1 BTC miner needs to spend $26,170.

Calculate Profit

So, prior to the final decision, one must first calculate the total amount of electricity the hardware consumes and calculate the added costs to regular billings. The balance between mining costs and mining returns is crucial when deciding which hardware you should opt for.

There's a simple calculation miners often use to pinpoint the total hashes acquired per watts of electricity consumed. To check for yourself, divide your hardware’s hashrate by the total watts used in order to calculate the number of megahashes each second per watt. Factoring in additional costs including electricity powering your computer for a more accurate account of what costs to expect if you were to begin mining.

To help make this process easier, many calculators exist to help miners understand exactly where they’re spending and the amount of profit once can expect. One calculator in particular, entitled BTC Mining Profit Calculator, provides users with an easy way to plug in each calculation including hash rates, equipment costs, and total watts used. This will help potential miners understand what profits can be expected and when miners will begin to see results.

How it Started

Before Bitcoin became the rapidly growing high-value cryptocurrency we have today, early miners became inspired by the concept of a decentralized system in which users played a part in governing each transaction.

While Bitcoin was at its youngest, miners could produce it with the only laptop. Or, to be precise, with the CPU, or computer processing unit. This method was also very cost effective. As the industry began to grow, and miners continued to secure the blockchain network as a means to earn coins, they were forced to become innovative. Currently, CPU mining for Bitcoin has been rendered obsolete.

New Era of Mining

In a minute graphics cards (GPU) replaced the CPU in bitcoin mining. As they consume a much less electricity, while creating rapid results, GPU soon offered a significant boost in mining. As a result, numerous companies have developed a more sophisticated equipment to increase mining capabilities, facilitating the cryptocurrency industry we have at present.

Today, crypto mining has grown to be a mainstream lucrative business where many users are now profiting from huge Bitcoin farms. With the use of various heavy duty mining equipment, graphics cards, and cooling devices.

Even this was not enough. Developers have come up with new devices called ASIC. Their only purpose is to get a bitcoin. And with this, they cope tens of times better than the GPU or CPU. ASIC gave an incredible boost to the mining of BTC and enriched the manufacturing companies. For example, the largest player in the ASIC market, Bitmain, earned $1 billion only in Q1 2018. The state of affairs of the company is so excellent that Bitmain decided to enter the traditional financial markets and raise up to $18 billion of investments.

Business could not bypass such a flow of money and began to move mining to an industrial scale. And everything would be fine, but individual miners could not fight back huge companies as they monopolize the mining and the whole BTC blockchain.

So, “lone miners” have decided to unite for the sake of earning and maintaining the decentralization of the entire system.

Understanding Mining Pools

As the industry grows, and mining farms begin to take over the market with unlimited recourses and heavy-duty hardware, many individuals hoping to participate have begun to join pools rather than attempt to tackle the competition on their own. Pooled mining refers to an approach of mining in which several users join forces to pool their resources when generating blocks.

Together, pools have a higher chance of gaining rewards. However, profits will be then split between members of the pool.

In order to become a member of a pool, miners will need to sign up with an account on the pool’s website. Once logged in, the user can create profiles known as workers that are directly linked to each piece of hardware they will be using.

Another point to keep in mind the pool mining fee. On average, the cost ranges between one and ten percent. However, there are pools that do not require any additional charges.

What is cloud mining?

If you are interested in joining the mining community but don’t want the hassle of purchasing high-cost equipment, cloud mining could be the perfect option. Cloud mining consists of buying mining contracts which allow miners to utilize shared power provided by remotely located data centers.

This approach helps make the entire mining process much easier. Without actually having to manage hardware costs, electricity, software and more, cloud mining allows you to participate with nothing more than a bitcoin wallet.

Due to an alarming rise in scams across cloud mining operations, investors will need to be diligent when purchasing contracts. In addition, investors won’t have any control over the hardware used, which essentially leaves full control in the hands of the operators. This aspect of cloud mining is risky as you will be gaining less profit due to commission charges as well as the added risk of bitcoin instability causing miners to pull out of agreements.